The Master's Voice

What you need to know when you know you know nothing

1 GREEN

I DON'T USUALLY GET TOO PERSONAL IN GREEN because you're not reading this to learn about me. You know how I invest because I publish my strategies and portfolios, but as charming and hilarious as I am, I assume my little anecdotes aren't why you're here. Still, as we approach the now usual October anxiety, here's a good one. In the fall of 1997, I received a devastating call. A doctor I know--one of the wisest men I've ever met--had succumbed to the siren song of biotech investing. He'd spent the previous winter and spring loading up on three stocks he'd read about in a highly regarded newsletter. They rose nicely. He sold his tired old mutual funds to buy more shares of the biotech three. He borrowed as much as his broker would let him (50 percent of the value of the shares) to buy even more. When the stocks pulled back a little, the broker called in one of the margin loans. And that's when our hero should have gone looking for help. Had he called just about any experienced investor, he would have been told to liquidate those positions immediately (or trim them to no more than 10 percent of his portfolio) and spread the proceeds around in a more rational way.

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But he didn't ask for advice from me or any other disinterested party. With the market tanking that fall, the margin calls came faster. This time, there was no one from whom to borrow. By the time the doctor finally called me, he was in a full panic. His entire retirement savings--about a million bucks--was about to evaporate. On top of being broke, he was ashamed: "Why didn't I ask for help before disaster struck?" he said.

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The hardest thing to know about investing is when you know too little. In fact, a couple bucks lost in a stupid trade might turn out to be the best money you ever invest if you learn to recognize your weaknesses and the gaps in your knowledge.

As anyone who follows my portfolios knows, I like to invest in technology stocks; names like Lucent, Sun, and Dell have joined micro telecoms in my portfolios for years. But aside from DoubleClick (which made me a fortune) and E-Loan (which lost me almost as much), I've resisted Internet stocks. Not because I don't believe the Internet is the paradigm-changing phenomenon it clearly is, but because valuation tools that I love like war buddies had been tossed out the window like 1929 stockbrokers. I had to admit that I simply didn't have the equipment to make critical decisions. Furthermore, most of the companies sucked, and most of their stocks were nakedly overpriced.

But suddenly Internet companies aren't so pricey. And some of them are growing up--hiring actual managers. For the first time, the sector is unpopular. Time to buy.

So I called Paul Cook, manager of the Munder NetNet Fund (MNNAX; 85.90 percent over three years). Part of seeking help is selecting someone who'll give you good ideas that make sense and fit with the rest of your plans. Not only is Cook the owner of an excellent record, but his emphasis on embryonic companies that are positioned to function well as large companies fits my value-oriented strategy.

Cook told me to look for three things. "First, the business has to be able to scale, to grow, and the logistics can't get in the way," he said. Second, it has to be "defensible," meaning there has to be some barrier to entry so that competitors can't just come in and overrun it. Finally, the business should be "extensible," which means the company should be able to extend its product line or service to other categories. "And then margins," Cook added. "You've got to be able to generate a profit, and you've got to be able to get that profit in the near term."

This advice speaks more to nascent companies than established ones, but the point of getting and evaluating advice is to make it fit within your own approach to investing. Two companies currently in Cook's portfolio both suit his criteria and make sense to me and my investment style.

On July 21, I bought fifty shares of Cisco Systems and ten of VeriSign. You already know Cisco makes the routers and pipes that carry the Internet.

What I like about CSCO is that it weathered the battering many tech stocks sustained last spring and emerged as the second-biggest company in the world, worth more than ExxonMobil, Microsoft--everyone but GE. That means it can use its stock to buy companies discounted by the market. In fact, a couple days after I bought, Cisco made its fourteenth acquisition of the year, snapping up Komodo Technology for $175 million--all in stock.

My other choice, VeriSign, perfectly fits the Munder model. For the leader in the business of authenticating information that passes over the Internet, the scalable part is easy. If you believe the Internet will continue to grow exponentially, then you believe that users will need to verify that the party on the other side is who it says it is. Defensible is tougher to prove, but the relative strength of the stock is a cudgel in what will certainly be a tumult of consolidation. And it's moved first on lots of scores, introducing the first cable-modem digital-authentication system during the week I bought. Finally, since I don't doubt the demand, the margins will likely improve when the consolidation I'm expecting takes full effect. At least that's the plan.

The Internet is the world in which I make my living; I study it hard and understand it well. But as an investor, it's a very tough call. So I asked for help.